Communications tax is not like sales tax. Here’s what you need to know.
Has your company recently discovered it's liable for communications tax? If so, you're far from alone. Across sectors, countless businesses are learning that new technologies are on the hook for regulatory fees and special taxes.
Now, the question is: How will you stay compliant?
The answer may not be as simple as you'd initially think. Communications tax can be very different from sales and use tax. And depending on the number of geographic markets you serve, it can get highly complex.
The complexities of communications tax
Unlike sales and use tax, which is often based on relatively straightforward calculations, communications tax can involve many complicated twists.
The term communications tax refers to a multitude of taxes, fees, and requirements imposed by federal, state, local, and municipal governments. It includes everything from long-standing telecommunications taxes to relatively new streaming taxes, and encompasses a host of regulatory fees, public utility fees, emergency fees, and more. Depending on the types of services you provide, you might be liable for 911 and 988 fees, the Federal Universal Service Fund (FUSF) fee, telecommunications relay services (TRS) fees, utility user taxes (UUT), and the communications services tax (CST) — to name a few.
All those fees and taxes must be built out on top of an already-complex foundation of sales and use tax. You'll need to figure out which jurisdictions require what types of communications tax, including those touched across your supply chain, and then present them with proper clarity in billing. Because every state and local jurisdiction takes its own approach to communications tax, each line item on a single bill could be subject to its own unique combination of taxes and fees. And unlike sales and use tax, there’s no way to simply tally up the total and then calculate tax.
These are the kinds of scenarios companies can face after adding voice, video, or connectivity to a product or service. And it’s up to the business to correctly identify which communications taxes and regulatory fees apply. For a large company with a national footprint, that could mean tracking as many as 60,000 taxing jurisdictions across North America to stay current on hundreds or even thousands of compliance requirements. And because rules and rates change constantly, they need to be continually monitored for updates.
So, how do you make those determinations?
While most of these taxes and fees were originally created for traditional voice, pay TV, and networking services, many are now being applied to a wide range of new technologies. SaaS and UCaaS platforms, managed service providers, streaming platforms, and IoT connections are all potentially on the hook, as are many hosting, SDN, and cloud service companies.
As communications tax authorities work to catch up with the pace of technology innovation, there is some confusion. If you’re selling the latest and greatest, there may be controversy about the product’s inclusion in various tax bases. And if you're still relying on a sales tax engine alone, you may be at risk. Staying up-to-date on the many complexities of communications tax compliance will require specialized tax software and billing solutions.
When your sales tax engine is no longer enough
As you begin to assess which communications taxes apply to your products and services, you’ll soon discover there’s more than just taxes and fees to worry about. In many instances, tax treatments will vary based on your business model, pricing strategies, merchandising methods, and more.
Each time you bundle products together, you open the door to a wide range of complex calculations that must be billed and reported accurately. Services like calling, SMS, videoconferencing, and click-to-call could each be subject to its own separate set of communications taxes across jurisdictions. And in some jurisdictions, including just one communications-taxable item can make the entire bundle subject to communications tax.
When adding fees to a bill, you’ll need to be conscious of the potential for tax on tax complexities. These can come into play when a regulatory fee is added as a surcharge, which many states view as yet another taxable receipt. These additional communications tax amounts often need to be calculated to the diminishing penny — and can get very confusing, very fast.
Sales and use tax engines are not built to handle this level of complexity on their own. And each time you opt to file sales and use tax alone, your risk of a potential communications tax audit resulting in hefty fines and penalties can increase.
How to get ahead with communications tax compliance
If your company still serves customers in only a handful of local markets, it may be possible to manage your compliance risk on your own — for a while, at least. However, many billing systems and sales tax engines are not built to meet the constant pace of communications tax changes.
For this reason, many companies on the communications tax bubble are turning to specialized software to automate calculations, streamline billing, and generate accurate returns. In many scenarios, tax automation systems that unify the abilities to calculate sales and use tax as well as specialized communications taxes become crucial.
Read our 2022 blog, Communications tax is not sales tax 2.0, for more up-to-date information.
To learn more about how this type of communications tax technology works visit Avalara for Communications.
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